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Most, if not all mortgages contain what is called a “due on sale” clause. These clauses generally provide that if the borrower sells or transfers the property encumbered by the mortgage, then the lender has the right to declare the mortgage immediately due and payable.Continue reading »

While this type of rule does seem fair in the context of an arms-length deal, what about situations where the property is being transferred from a deceased person to his children or other beneficiary pursuant to a will? Should the estate be subject to the “due on sale” clause and be responsible for paying the mortgage in full at the moment of transfer? Or if the estate cannot afford it, should the beneficiary be stuck with the bill?

Fortunately, a federal law called the National Housing Act and commonly known as the Garn–St Germain Depository Institutions Act says “no” if the property contains less than five dwelling units or is a cooperative apartment Additionally, New York State passed their own version of the law which also states that the “due on sale” clause is invalidated in many situations, some of which include:

a transfer pursuant to a will or a transfer resulting from the death of a borrower;

a transfer where the spouse or children of the borrower become an owner of the property; or

a transfer pursuant to a divorce or a legal separation agreement.

Both laws state that the lender may not exercise the “due on sale” option where the borrower transfers the property to his spouse or children during the borrower’s lifetime. Accordingly, a person could transfer property to their child or spouse in life without the mortgage becoming immediately due and payable.

Unfortunately, while this is the law which applies, mortgages rarely state that there are permissible transfers. Instead, the “due on sale” clause only tells the borrower that if they transfer the property, the mortgage is immediately due and payable. It is up to the borrower to dig through the statutes and scrutinize their contents to determine whether their transfer is exempt. This seems categorically wrong. Since the lender has actual knowledge that these exemptions exist, it should be their responsibility to inform the borrower of the same in the mortgage document itself.

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As if divorce isn’t unpleasant enough, New York State and New York City will have their hands out to collect taxes for the transfer of your apartment pursuant to a separation agreement. This can be a real bitter pill to swallow. Continue reading »

Transfers of real property are generally subject to transfer taxes if the consideration exceeds $25,000. But what if the transfer of your real property is pursuant to a divorce decree or separation agreement and not in connection with a sale to a third party? In New York, transfer taxes must still be paid.

Even though you are not technically putting your apartment up for sale, finding a buyer and directly exchanging the apartment for money, the transfer of your apartment from one soon to be ex-spouse to the other is still subject to the transfer taxes, which are generally calculated based upon the fair market value of the apartment.

The amount of the taxes can be hefty and an unwelcome surprise for the unwary. For example, the transfer of an apartment owned by the Husband (50%) and the Wife (50%) to the Wife with a fair market value of $2,200,000.00 would cost the Husband $20,075.00 in City and State transfer taxes and cost the Wife $11,000.00 for the “Mansion Taxes”.

In NYC, the rules regarding transfers of apartment pursuant to a divorce come from Section 23-03(d)(3) of Title 19 of the Rules of the City of New York. “A conveyance of realty from one spouse to the other pursuant to the terms of a separation agreement” is subject to tax. The NYC transfer form (NYC-RPT) directly address this type of transfer by requiring the filer to provide the following information: (i) the fair market value of the property; (ii) the existence of any unpaid mortgages; (iii) the percentage of ownership being transferred; and (iv) any alternate value assigned to the transferred interest that is contemplated in the separation agreement.

In NYS, the rules regarding this type of transfer come from Section 575.11(a)(10) of Title 20 of the New York Codes, Rules and Regulations. “A conveyance from one spouse to the other pursuant to the terms of a divorce or separation agreement is subject to tax.” While the NYS transfer tax form (TP-584) does not directly deal with this type of transfer like the NYC-RPT does, the State still requires the parties to calculate and pay transfer taxes. There is a rebuttable presumption that the consideration for the conveyance, which includes the relinquishment of marital rights, is equal to the fair market value of the interest in the apartment conveyed. As with the NYC-RPT, if the parties would like to assert that the value of the apartment is something different than the fair market value, then they must point to the value enumerated in the separation agreement.

In sum, while you may think you are getting swindled by your ex-spouse, NYS and NYC are there to deprive you a little bit more by subjecting you to transfer taxes.

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When you finance the purchase of a cooperative unit, the loan you receive from the bank is not a mortgage, as the lay-person may believe. Rather, the loan is secured by a security agreement giving the lender a security interest in the stock certificate and proprietary lease. In order to “perfect” the security instrument, the lender files a UCC financing statement which becomes public information putting the world on notice that a lien exists on the apartment. Continue reading »

The UCC is analogous to recording a mortgage on a condominium unit with the county clerk. After the mortgage has been paid off, a satisfaction of mortgage is recorded. With a cooperative apartment, after the loan is paid off, the lender is required to file a UCC termination statement.

As those who have been involved in the purchase or sale of a cooperative apartment know, UCC financing statements are a constant source of trouble and delay for two reasons. The first is that the lender will often want to file a UCC before the loan is ever made. When the loan fails to never materialize, it is not uncommon for the lender to fail to terminate the erroneously filed UCC.

The second stems from the fact that many attorneys (specifically lender’s attorneys) are not following the “best practice” of terminating a UCC after a loan is paid off. This tends to happen when a borrower refinances their current loan and the lender fails to terminate the prior UCC representing the now paid off or consolidated loan.

As a result, there are countless inactive UCC financing statements out there falsely telling the world that a security interest exists on with respect to a cooperative apartment even though the loan has been paid off, or even worse, never originated. This becomes a source of delay and additional costs when a person is gearing up to buy or sell or refinance their loan because the new lender will want the property to be “free and clear of all liens.”

The lender’s oversight places a financial burden on sellers and borrowers in terms of attorneys’ fees and filing fees. In our experience, it has always taken at least a few phone calls and emails to track down the initial filer of a UCC on behalf of a client in preparation for their impending transaction. While we have been able to have the erroneous UCC terminated without a hitch, the situation has the dire potential to cost the client a substantial amount of money. For example, if the company or attorney who filed the initial financing statement goes out of business, we may have to spend more time and money tracking down the lender to receive authorization to terminate the financing statement. Or worse, if we cannot contact the filer in a timely manner, the closing may have to be adjourned, costing the client real money in terms of additional interest paid, adjournment fees or attorneys’ fees.

Why are the parties entrusted with perfecting a lien in accordance with the Uniform Commercial Code so careless and irresponsible when it comes to filing the termination statements? You do not see this magnitude of recklessness when it comes to recording satisfactions of mortgages. While the recording of both of these instruments has a similar effect, to put the world on notice that a lien no longer exists, they seem to be treated unequally in how they are administered and processed by the lenders.

In light of the lender’s indolence and ineptitude with regard to the administration of UCC financing statements, we suggest penalizing the lender who fails to correctly file a termination statement. A fine of at least $500.00 would seem adequate to get the lender’s attention. By invoking a financial consequence on lenders, the burden and cost associated with terminating erroneous UCC financing statements would be shifted from the individual borrower to the lender, where it belongs.

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In today’s fast-paced market, an all-cash buyer is very attractive to sellers of cooperative units. As banks are increasingly sluggish in giving out mortgages, they are creating undesirable delays in the process of buying and selling property. To avoid the inevitable setbacks associated with obtaining a mortgage to purchase a cooperative unit, if feasible, it may be advisable to purchase the unit with cash and obtain a mortgage after the closing. Continue reading »

Obtaining a Mortgage Pre-Closing

The typical scenario for purchasing a cooperative unit with a mortgage is as follows: a mortgage contingency or non-contingency clause is drafted in the contract. Most cooperative boards require a copy of the mortgage commitment letter as part of the purchase application so the purchaser cannot submit the application until they have obtained the commitment letter. The purchaser then typically may have 30 days to obtain the commitment letter after signing the contract followed by a few business days after receipt of the letter to submit the application to the board.

The practical result of purchasing the unit with a mortgage is that the purchase application will be delayed until a mortgage commitment is obtained. This is very unattractive for the seller who needs to know if the buyer will pass the board’s muster as swiftly as possible.

Obtaining a Mortgage Post-Closing

If it is feasible, the purchaser may want to consider buying without a mortgage and obtaining a mortgage after the closing.

However, this has several pitfalls. First, under IRS Publication 936, the purchaser will not be able to deduct the interest from the financing unless the mortgage is obtained within 90 days of the closing date. This time constraint could be an issue on multiple fronts. First, the new shareholder will be required to obtain the cooperative board’s consent prior to being allowed to get the mortgage. As such, there is the risk that the cooperative board may not approve of the shareholder’s decision to obtain financing. Second, even if the cooperative board is amenable to the mortgage, they may be unhurried in approving the same. Consequently, the board’s approval process puts the shareholder at risk of not meeting the 90 day deadline mandated by the IRS.

Another disadvantage of obtaining the mortgage post-closing is that the interest rates available to the borrower may not be as favorable.

However, this may be worth the risk to the buyer who really wants to trump the competition.

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Our last post discussed a case in which the City was successful in enjoining Smart Apartments from advertising for transient (i.e. less than 30 day occupancy) rentals. On this NYC marathon weekend when the City is virtually flooded with tourists here for very short periods, we thought it appropriate to revisit this issue. Continue reading »

The Environmental Control Board (the “ECB”) has now decided that the short-term rental of an apartment (less than 30 days) via websites such as Airbnb is legal, so long as a permanent occupant of the apartment is present. Apparently the dire issues of safety and nuisance, which the City had argued in another case is the purpose of the regulation, were sorted out through the presence of a roommate. Arbitrary? You be the judge!

The ECB decision overturned a $2,400.00 fine imposed on the owner of a condominium unit whose tenant used Airbnb to rent a room out to a Russian tourist for three days. According to the original decision, the Airbnb user was in violation of the Administrative Code of the City of New York § 28-118.3.2 because that short-term rental was contrary to law.

The relevant part of the Multiple Dwelling Law, Article I §4(8)(a) (the “MDL”) and the Administrative Code of the City of New York § 27-2004(a)(8)(a) (the “Code”) provides that a Class A multiple dwelling shall only be used for permanent residential purposes, which is defined as occupancy by the same person or family for 30 consecutive days or more. However, the MDL and the Code also states that occupancy for less than 30 consecutive days by other persons living within the household of the permanent occupant such as house guests, or lawful boarders, roomers or lodgers is not inconsistent with the occupancy of a dwelling unit for permanent residence purposes. The MDL goes on to define a boarder, roomer or lodger in part as “…a person living within the household who pays a consideration for such residence…”

Here, the ECB found that the tourist’s three day occupancy of the apartment was not illegal because the tourist shared the apartment with the Airbnb user’s roommate. In other words, according to this case, a would-be illegal short-term renter may legally rent a Class A dwelling unit for less than 30 consecutive days so long as a permanent roommate is present at the time of the occupancy. It is irrelevant that the roommate and the tourist were strangers, as the MDL does not require the individual renting the apartment to have a personal relationship with the permanent occupants of the residence.

It should be emphasized that the exception to the 30 day rule, which this decision suggests, is tailored to a situation where at least one permanent resident of the apartment is occupying the apartment at the same time as the renter.

We believe that the MDL provides a distinction without a difference and this case only serves to amplify the absurdity of the law, demonstrating that it is not based in reason or reality. As we previously stated, it does not make sense to prohibit an individual from renting his or her apartment for 29 days but not for 30 days. It is similarly irrational to prohibit someone from renting an apartment for 30 days unless a legal tenant is present. These ambiguities make us wonder what the actual purpose of this law is and if it is regulating the people it was designed to regulate?